Who will win and lose if interest rate rises?

It is hard to think of another Bank of England decision that is simultaneously as momentous and as inconsequential as this one.

The mere fact that the Bank’s Monetary Policy Committee is widely expected to raise interest rates this month is a landmark moment all of its own.
It would be the first time rates have been lifted in a decade – a watershed after a period in which borrowing costs dropped to the lowest level on record.
And for many economists, it is only the start of a long road that might take rates back up towards a more normal level (though this will almost certainly be lower than the pre-crisis “normal” of about 5%).
But, on the basis of other measures, an interest rate rise is likely to have little impact. In part that is because, for all the headlines recently about levels of indebtedness, Britons’ overall household debt levels have actually dropped a fair bit in recent years.
A decade ago in the summer of 2007, the last time the Bank raised rates, the average UK household had £1.44 of debt for every pound of savings they had in the bank. Today, that ratio has dropped to £1.13 of debt for every pound of savings.
Yes, that number has started to rise recently thanks to an increase in consumer credit lending, but only very slightly – and it is a long way shy of its pre-crisis peak.
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Then there’s the question of how many people will feel an instant impact of the Bank’s decision – the “transmission mechanism”, to use the economic terminology. Here, too, things have changed.
Five years ago, 73% of the population had floating rate mortgages – in other words, loans where rates would instantly go up by 0.25% or near enough as soon as the Bank did likewise.
Today, only 43% of mortgage holders have floating rate loans – the lowest proportion in history. That’s the total stock of loans across the UK, many of which will be smaller loans.
The reality for recent homebuyers (the ones with the bigger loans) is even more stark in the most recent quarter. A whopping 94% of mortgages were issued with fixed rates – the highest proportion in history.
Long story short: fewer people than ever before will be affected on day one.
None of this is to say that higher interest rates won’t take their toll. It just underlines that the impact will be gradual and subtle, rather than immediate.
But as anyone who has experienced debt problems before will know, that is precisely the way individual debt problems mount.
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You face a short-term problem – say your rent going up, your job being lost or hours being cut, and you borrow a little bit to tide you over.

Then things get worse, not better. Your debt costs rack up further and you find yourself mired in debt you can no longer see an escape from.
It is a lonely, miserable experience, and something many families in the country struggle with.
And that is the important point about rising interest rates. The Bank is not worried about a nationwide debt crisis, or an abrupt implosion of demand as it increases the cost of borrowing. However, it is concerned about small pockets of trouble across the country.
In particular, low income households are likely to be most exposed – families who have had to borrow to absorb the cost of rising food and fuel prices, who have seen their real wages slide, and are now facing extra pressure from the benefits squeeze. It is they who will be most affected by rising rates.
Again, this may not happen overnight: indeed, of all the interest rates out there in the market, those on credit cards and payday loans are perhaps least affected by Bank rate itself. But any increase in the cost of borrowing is unlikely to help.

Image: Mark Carney argues the Bank of England’s influence is limited
Finally, what about savers? Well, this is where things get interesting.
On the one hand, savers have had a torrid time over the past few years – especially those expecting to live off the interest on their savings.
On the other hand, the vast majority of other asset prices have gone up dramatically in that period: share prices, house prices (although mostly house prices in London), bond prices.
Moreover, savers have benefited from an unusual phenomenon in recent years.
Most of the time, the interest rates you’re paid on your savings is below the official Bank rate.
For instance, between 1999 and 2008, the average rate on an instant access savings account was 2.2 percentage points below the official Bank rate – and the rate on a long-term savings account was 0.6% below Bank rate.
Since the crisis, the average instant access savings account has paid 0.24 percentage points above Bank rate while the average long-term account has paid 1.66 percentage points above the official rate.
This is largely down to the fact that Britain’s banks have spent this period trying to rebuild their balance sheets by attempting to lure in new customer deposits.
In other words, while it hasn’t been a great time to be a saver, it hasn’t been quite as bad as the official Bank rate suggests.
Which raises another question: if and when the official rate starts going up, do the savings rates themselves also increase, or do they stay where they are?